Dont get burned by following ideology

Is Capitalism 2.0 a Mirage? (Part 1 of 2)

PART 1 of 2

When Lou Gerstner took over IBM at a time of corporate crisis, he was asked if he would chart a radically new direction for the firm. His memorable response was, “The last thing IBM needs right now is a vision.”

For the past several decades, business has had a vision; one so dogmatically defined that we might even call it an ideology—the ideology of Capitalism 1.0. Now that vision has turned toxic. Many agree with Michael Porter that business is now facing a crisis of social legitimacy.

The question is–what to do about it? Does capitalism need a fundamental reframing? Or is the issue more one of execution, about getting along in broader society?

In this two-part blogpost, I’ll examine the case for radical reframing–let’s call it the search for Capitalism 2.0. Part 1 provides background and two approaches to Capitalism 2.0. Part 2 evaluates the results.

REFRAMING CAPITALISM

One answer to the problem of business legitimacy is to re-frame Capitalism. Re-thinking capitalism is as tempting to capitalist ideologues as rethinking Marxism was to generations of socialist ideologues. ‘If “shareholder value maximization” isn’t working, then let’s come up with another encompassing business theory that is even broader than the old one, but that works. Let’s call it Capitalism 2.0.’

Two of our leading thinkers—Michael Porter, with Mark Kramer, and new kid on the block Umair Haque—are attempting an intellectual rebooting of the capitalist operating system. Porter’s concept, contained most recently in an HBR article, is Shared Value. Haque’s new book is called The Capitalist Manifesto.

Can capitalism truly be re-visioned from within? Or is it a closed system whose solutions must come from without? If anyone can square the circle, these authors can. Let’s start by understanding what they’re reacting to.

Capitalism 1.0

The full name of Harvard Business School used to be “The Harvard Graduate School of Business Administration.” In the 1950s, that name was apt. Adam Smith was rarely mentioned—Schumpeter and Hayek, even less.

It was pragmatic, non-ideological. Peter Drucker had just begun to conceive of management as distinct from administration; ‘strategy’ was an occasional term, borrowed loosely from military theorists.

In the 70s and 80s strategy went quantitative, bringing us portfolio management theory, the growth/share matrix and log-scale experience curves.

MBA consultants flooded boardrooms with models in lieu of gray hair. Consulting firms seized thought leadership from the business schools. An ideology was being born.

Capitalism 1.0, circa 1980

Around 1980, the core business ideology saw business as a corporate competitive struggle for dominance and survival. All players—producers, their customers, their suppliers, government and regulators—competed. Winning was defined financially, driven by market share, in turn driven by competitive strategy.

Economists and financial theorists joined the mix in the 1980s. One result was greater emphasis on debt, which led to junk bonds, LBOs, private equity and the S&L crisis. Another was the reign of Alan Greenspan and the Chicago School of Economics, whose contribution to dogma was the idea that markets are largely self-correcting.

As tech boomed, the public caught the bug as well. Wall Street created day trading, hedge funds and IPOs, and the public bought it.

Capitalism 1.5

By around 2006 capitalism’s dogma had become more sharply stated—something like:

Business is the value-creating engine of all society. It works best when left alone. Through creative destruction and the Darwinian efficiency of self-correcting markets, it creates value and wealth for all. All business transactions can and should be expressed in present value cash flows terms. The social purpose of a corporation is to earn a profit, and its proper goal is the maximization of shareholder value.

The dogma had held despite Michael Milken, Marc Rich, the S&L and Long-Term Capital crises, Enron and WorldCom. But then came the financial crisis of 2008.

Several items are striking. Alan Greenspan recanted his belief in Capitalism 1.X. Nearly every Chicago economist (notably excepting Eugene Fama) shifted back in the direction of Keynesian economics; Paul Samuelson says Milton Friedman himself would have done so.

The MBA Oath was created at Harvard in 2008. One of the group’s faculty advisors, Nitin Nohria, became the next Dean of HBS. He believes business needs to be more socially attuned–away from shareholder value maximization, toward broader social responsibilities.

In other words, Capitalism 1.X is under attack as a belief system. What will take its place?

The Search for Capitalism 2.0

Business strategists and economists love elegantly simple models. Many past successes have come via idea home runs—redefining paradigms, thinking outside boxes, changing game rules. Porter and Haque have made powerful attempts to do so, as follows:

Shared Value and the Capitalist Manifesto

Both approaches describe Capitalism 1.X’s failures sweepingly. They indict zero-sum thinking, short-termism run amok, and a systemic inability to link corporate benefits to social costs. If anyone needs a comprehensive statement of what’s wrong, look no further than these two works.

Each work also describes a better end-state; longer time horizons, broader collaboration, comprehensive calculations. Yet the solution, both Porter and Haque seem clearly to say, lies in ideology: in re-framing the tenets of capitalism.

Here is Haque’s version:

The industrial age’s dilemma is unsolvable if we’re still confined to thinking in yesterday’s terms…Escaping the capitalists’ dilemma requires a paradigm shift.

The outlines of an updated economic paradigm…include two fundamental axioms:

…first…through the act of exchange, an organization cannot, by action or inaction, allow people, communities, society, the natural world, or future generations to come to economic harm. [Italics are Haque’s]

Porter is equally didactic:

The purpose of the corporation must be redefined as creating shared value, not just profit per se.

The concept of shared value resets the boundaries of capitalism.

Not all profit is equal—an idea that has been lost in the narrow, short-term focus of financial markets and in much management thinking. Profits involving a social purpose represent a higher form of capitalism—one that will enable society to advance more rapidly while allowing companies to grow even more.

We need a more sophisticated form of capitalism, one imbued with a social purpose. But that purpose should arise not out of charity but out of a deeper understanding of competition and economic value creation…It is not philanthropy but self-interested behavior to create economic value by creating social value.

This all begs some pretty big questions: what exactly do we get with a new definition, a new paradigm, an axiom? Do the authors mean that the single biggest, most critical issue is to fix our thinking? Is it really necessary to have a new paradigm in order to get on with matters?

And even if it is necessary to re-think capitalism–is the re-thinking a sufficient condition for getting the job done? For that matter—can it even be done at all? Can we really stretch “capitalism” so far as to equate social good with corporate self-interest? Or is Capitalism 2.0 really a mirage, a distraction from more mundane but critical ways of changing business?

Tomorrow: Part 2 of 2: Capitalism’s Search for the Holy Grail.


7 replies
  1. James A. Boyd
    James A. Boyd says:

    Hi Charlie,

    I can hardly wait for part 2 of this blog. I feel much of our problem lies in a belief that “shareholder maximization and broader social responsibilities” are mutually exclusive terms or concepts. I think Porter is heading in the right direction in this regard with his redefinition of capitalism. For me, this is particularly evident in the last paragraph of the comments of Porter – “We need a more sophisticated form of capitalism, …not philanthropy but self-interest behavior to create economic value by creating social value.” This could be at the very heart defusing the mutually exclusive paradigm that grips many who fear a change in thinking about traditional capitalism.

    Looking forward to tomorrow’s post.

    Until then, make it a great day.

    Jim.

    Reply
  2. peter vajda
    peter vajda says:

    So, being removed from “things economic” per se, but not from how folks live their lives, which includes “work,” I have some thoughts and questions:

    I’m curious if our recent financial and economic failures are also moral failures? And why do some folks have so much faith (trust?) in the economy and free markets but not in each other? Or is trust and faith in others based solely on monetary standards, “giving to get” and the like?

    What I find curious is that our economic morass is perpetuated by folks – e.g., politicians, economists, Wall St. folks, greedy folks – who actually believe that our economy is sustainable as long as we don’t have government interference – believing that our business leaders have the willingness and ability to make rational (rational!) decisions based on the long-term interests of their companies.

    As you and others suggest, this “long-term” paradigm is one element that needs reframing. What gets lost in translation is the insidious and corrupting influence of greed.

    Also needed is the reframing of what our economy points to as priorities: producing the next latest gadget, expensive car, and TV, while our roads and bridges collapse and fall apart. Teeth whiteners line almost complete shelves in our stores but millions are without basic dental care. Many have access to cutting-edge medical technology, while local hospital emergency rooms are turning out their lights for lack of financial support.

    While many businesses and organizations continue to prioritize and produce the latest and greatest, they seem to lacking in prioritizing core values. And this misidentification, too, is driven by consumers.

    We’re confused by values – what’s of true value and what’s of artificial value – the former relating to support one’s true and real sense of “well-being” and the latter related to “pleasure (ego). We seem to have an economy driven by the latter – a type of greed that can never be attained.

    So, businesses driven by what? –“maximum shareholder value” or greed, and profits – produce things of artificial value while our roads decay, bridges collapse and hospitals close.
    The issue here is that “common-sense” discussions of the economy are anything but “common sense” because so many folks are addictively attached to their beliefs, assumptions, premises and stories about what “works for me.”

    As businesses continue to regard people as “human capital, my take is our economy will continue to erode and become unstable and, worse, unjust.

    On the other hand, we have Bhutan, which is successfully following the economic principle of Buddhism where (gasp!) the GDP is replaced by the gross national happiness (GNH) AND it is higher than most developed countries.

    Too, there are examples of co-operative models as alternatives to capitalism. Co-operative enterprises where community pool their resources for common purposes, voluntarily and work within basic cooperative principles to provide for the common good and well-being of the community. (Just imagine the shivers, unpleasant gut reactions, and other bodily emotional and feeling sensations some sense when they just read about such things. UGH).

    Finally, companies such as IBM, Proctor & Gamble, Omron (Japan), Banco Real (Brazil), do more than create pretty mission statements. They create value by looking at the larger good, what the community or the world needs and ask how their organization can contribute. In a sense they look to see how the world can be their customer.

    Haque is right, IMO, “…The industrial age’s dilemma is unsolvable if we’re still confined to thinking in yesterday’s terms…Escaping the capitalists’ dilemma requires a paradigm shift.

    But, who is it who’s going to change their paradigm? Einstein said, “”The significant problems we face cannot be solved at the same level of thinking we were at when we created them.” He also said, “”Nothing truly valuable arises from ambition… it stems rather from love and devotion towards men… Hmmm, perhaps paradigms too threatening.

    So, for example, who will feel comfortable asking, “What does society need?” instead of “What do I need?”

    Who will agree to put their finger on the pulse of a changing society, rather than keep it on their own pulse?

    In essence, it’s not about the money, the profits; it’s about what one does with the money, and why.

    I agree with James Boyd, “…I feel much of our problem lies in a belief that ‘shareholder maximization and broader social responsibilities’ are mutually exclusive terms or concepts.”

    And to return to Haque, “…first…through the act of exchange, an organization cannot, by action or inaction, allow people, communities, society, the natural world, or future generations to come to economic harm.”

    That organization he speaks of is not some amorphous or ambiguous entity; it’s one individual, and another individual and another and another.

    Parson my cynicism but I’m curious how many of those individuals have signed or will sign an MBA Oath and/or pledge to do no harm…or in Gandhi’s words, “Be the change you want to see.”

    Ego and reified, calcified misguided values are hard to change and transform. Not impossible, but very, very hard.

    Perhaps what we’re witnessing in some small but significant ways is a move towards Economy 1.675, then 1.775, etc., and it’ll take some time, if at all, before we experience a true Economy 2.0 in the foreseeable future.

    Until and unless folk are disabused (either of their own volition or by some external power or force) of their addictions to their “economic” stories (which addictions are a matter of one’s heart and soul transforming first, not mental paradigms, not financial, greed-based attachments), I’m not holding my economic 3.0 breath.

    New definitions, paradigms and axioms are not the issue – the issue is who is it who will honestly, sincerely and self-responsibly embrace and choose to live those new definitions, paradigms and axioms, right here, right now.

    I admire Haque and Porter for tugging on our collective sleeves. But, will their work go the way of similar others….nice, interesting, and good conversation, but wanting me to change, well, uh, not just right now. You go first.

    I’m awaiting Part 2 with curiosity.

    Reply

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  1. […] and Mark Kramer’s Shared Value concept, and Umair Haque’s Capitalist Manifesto.  And while I’ve critiqued their sloppiness, there’s no question they’re heading in the right direction, and spreading a lot of heat and […]

  2. […] week Charles Green over at Trusted Advisor has a mammoth, two-post discussion of the same topic, “Is Capitalism 2.0 A Mirage?” It’s good stuff; check it out. Share and […]

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